Hi Gezzy,
This is my first post on this site but hope I can help you a little.
I used my PPOR equity for my first IP and it has worked out great.
I borrowed 105% for my first IP using my PPOR equity as a 'deposit'. This covered loan costs and Stamp Duty.
My lender for my IP now has a second mortgage on my PPOR (I have over 250K equity in my PPOR)
In my case it has worked really well as I bought my IP for 415K in Dec08 and it is now worth $435k+ to my estimates from recent sales of the same sort in the same area, without doing any work on the property other then cleaning the gardens up a bit.
My IP is now worth more than I owe, only 6 months after purchase and due to low interest rates and high rents in Darwin it is paying it's way, covering the interest only payments already. (renting for $500/wk)
My advise is……..buy low and reap the capital gains on settlement. I went to over 60 open houses in the area I was looking at buying in and built a good raport with agents in my area. Be ready to buy if you look at a property, have your finances ready, you want to be able to sign a contract if you are confidant that the property is the right price, on the spot. (both my current PPOR and my first IP contracts were signed within 1 day of going on the market and both were for the asking price)
For me using my equity in my PPOR was the right thing to do, but it depends on how much equity you have in your PPOR, the capital growth in the area of your PPOR and your IP and how good you are at buying under market value.
I could have taken $83,000 from my offset account on my PPOR loan and paid the 20% needed to avoid LMI and make my IP stand alone but that would have given me $83k more debt that was not tax deductable and only given me a tax deductable debt of $336k of which the interest would be tax deductable. As it stands I have a debt of $434k on an interest only loan that is fully tax deductable and any extra cash I pay off my PPOR non deductable loan.
So….. I recommend using equity in your PPOR and giving your IP lender a second mortgage on your PPOR as long as you follow due diligance and research your IP purchase so you increase capital when you buy or by increasing capital gains by renovating or market forces in your area.
I intend to remove the second mortgage on my PPOR given to my IP lender as soon as my IP gives me a LVR of 80%, this will take a few years.
I would use it again if I needed to though for another investment.
Hope that helps…
OBIE
Obie
Welcome to the forum and I hope you enjoy your time with us.
Agree with your sentiment but hate to say it is not all that easy depending on numerous factors
I intend to remove the second mortgage on my PPOR given to my IP lender as soon as my IP gives me a LVR of 80%, this will take a few years.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:ObieWelcome to the forum and I hope you enjoy your time with us.
Agree with your sentiment but hate to say it is not all that easy depending on numerous factors
I intend to remove the second mortgage on my PPOR given to my IP lender as soon as my IP gives me a LVR of 80%, this will take a few years.
Thanks for the welcome
What factors do you mean?
If my IP lender does not want to remove the second mortgage on my PPOR I will just refinance them out of the equation.OBIE…
Obie
Sorry but that is one of the issues of X collateralising loans you just cant do it
If my IP lender does not want to remove the second mortgage on my PPOR I will just refinance them out of the equation.Assume that the Investment property has increased in value but your PPOR has fallen in value or has remained stagnant.
Sure you maybe able to refinance the IP loan but your existing lender may also ask you to pay down some of the debt on your PPOR mortgage.The whole concept of refinancing is usually to raise funds for further deposits but it is not that easy.
I have had 101 clients approach me over the years asking us to unravel the mess they have got into with X collateralising securities and you are at the prayer and whim of the existing lender.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:ObieSorry but that is one of the issues of X collateralising loans you just cant do it
If my IP lender does not want to remove the second mortgage on my PPOR I will just refinance them out of the equation.Assume that the Investment property has increased in value but your PPOR has fallen in value or has remained stagnant.
Sure you maybe able to refinance the IP loan but your existing lender may also ask you to pay down some of the debt on your PPOR mortgage.The whole concept of refinancing is usually to raise funds for further deposits but it is not that easy.
I have had 101 clients approach me over the years asking us to unravel the mess they have got into with X collateralising securities and you are at the prayer and whim of the existing lender.
This recently happened to one of my friends. cross collateralised 2 properties. He had a heart attack and got behind etc then tried to sell one, but couldn't as the bank wouldn't release the mortgage without a $40,000 repayment on the remaining loan. values had dropped and he was tied in. he is going under now.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry Gezzy I don't need to hijack your thread but hopefully this info helps you anyway…
Richard, sorry I still don't understand why I would have a problem…
I have 48% equity in my PPOR and about 0% now in my IP… now if my IP due to CG brings my equity up past 20% I should be able to get my IP lender to remove the second mortgage on my PPOR.
If they refuse I seek another lender willing to give me an 80%LVR loan to pay out my current IP lender. I am sure I can find a lender who would like me to pay them $2,000 a month interest.I don't understand why my PPOR lender would object to a second mortgage by another lender being removed from my PPOR, especially when I have 50% equity in my PPOR at the moment.
Maybe I am just misunderstanding your post.
OBIE…
Obie
i think you are re read Terry's post and you will see some of the pitfalls with the strategy you have adopted.
Richard Taylor | Australia's leading private lender
Terry's post was not up when I posted mine just as I finished lunch and posted.
I can understand how that could be a problem though.
I have taken this into account though and have about 100k in an offset account for reserves as well as disability and death insurance and income protection insurance so I think I took that sort of risk into account.
I just thought there was something I was unaware of that you were refering to.
I am still happy with my choice of funding then and see little risk in my situation.
OBIE…
gibbo1 wrote:There are many different strategies used by different people. One of the advantages of 20% deposit is reduced lending costs. One of Steve's main aim's is finding CF+ properties, this is easier when borrowing smaller amounts.Another strategy is to borrow the maximum amounts possible (nowadays still a cpl of lenders around the 93-95% LVR) borrowing the maximum amounts is giving you a larger potential for capital growth. This then enables accessing equity to fund future purchases. As the process continues your maximum borrowing in individual properties is reduced. If you have a PPOR and an IP its possible to get a 95%LVR on both depending on the security of the property, income, etc. Down the track lenders wont like you having 30 properties all streched out to 95% LVR. Here they acknowledge the additional cost of LMI but this is weighed up against the capital growth potential and future buying power of that additional capital growth.
This is why it is important to read up on many different strategies used by different people and then finding one that you are comfortable with. Borrowing larger amounts carries higher risks, you must judge if this will be balanced out by higher gains. Also some strategies work better in different climates. Some strategies are harder to finance in the current climate.
Thanks gibbo1.
I have been doing as much reading and research in the little spare time I have in order to learn and work out a strategy that would suit me, but still so many questions to ask – I guess it's all part of doing your due diligence. We are lucky to have a forum like this where there are so many helpful people. My strategy was to save up a 20% cash deposit but since I started this thread and received many positive responses in relation to using equity, I'm looking towards that option. Saving the cash will, and is, taking forever!
I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
Gezobie1 wrote:Hi Gezzy,
This is my first post on this site but hope I can help you a little.
I used my PPOR equity for my first IP and it has worked out great.
I borrowed 105% for my first IP using my PPOR equity as a 'deposit'. This covered loan costs and Stamp Duty.
My lender for my IP now has a second mortgage on my PPOR (I have over 250K equity in my PPOR)
In my case it has worked really well as I bought my IP for 415K in Dec08 and it is now worth $435k+ to my estimates from recent sales of the same sort in the same area, without doing any work on the property other then cleaning the gardens up a bit.
My IP is now worth more than I owe, only 6 months after purchase and due to low interest rates and high rents in Darwin it is paying it's way, covering the interest only payments already. (renting for $500/wk)
My advise is……..buy low and reap the capital gains on settlement. I went to over 60 open houses in the area I was looking at buying in and built a good raport with agents in my area. Be ready to buy if you look at a property, have your finances ready, you want to be able to sign a contract if you are confidant that the property is the right price, on the spot. (both my current PPOR and my first IP contracts were signed within 1 day of going on the market and both were for the asking price)
For me using my equity in my PPOR was the right thing to do, but it depends on how much equity you have in your PPOR, the capital growth in the area of your PPOR and your IP and how good you are at buying under market value.
I could have taken $83,000 from my offset account on my PPOR loan and paid the 20% needed to avoid LMI and make my IP stand alone but that would have given me $83k more debt that was not tax deductable and only given me a tax deductable debt of $336k of which the interest would be tax deductable. As it stands I have a debt of $434k on an interest only loan that is fully tax deductable and any extra cash I pay off my PPOR non deductable loan.
So….. I recommend using equity in your PPOR and giving your IP lender a second mortgage on your PPOR as long as you follow due diligance and research your IP purchase so you increase capital when you buy or by increasing capital gains by renovating or market forces in your area.
I intend to remove the second mortgage on my PPOR given to my IP lender as soon as my IP gives me a LVR of 80%, this will take a few years.
I would use it again if I needed to though for another investment.
Hope that helps…
OBIE
Thanks OBIE, that's a great post and I'm glad things have worked out well for you. Your post has helped me understand more the benefits of using equity as opposed to cash as a deposit. Plus it's always good to hear other peoples' success stories.
I'm just not for x-collateralising as I've read it pretty much gives the bank a strangle-hold over your… well, over you. I could be wrong but I think Steve noted in one of his books to not have all your eggs in the one basket. I think it was also noted by one of the speakers at the Mega Conference in Sydney that it's not recommended.
I'm not judging or having a go, though – you sure know more about what you're doing than I do.
Cheers
Gezobie1 wrote:Sorry Gezzy I don't need to hijack your thread but hopefully this info helps you anyway…No dramas, Obie. The more info the better
Cheers
Hi, I'd told my story a couple of times already.
I'd never x-collaterize if I had a choice. The best case scenario is a lender to an IP, I think. But in many cases, just as in mine, loans are far easier if I x-collaterize. IP 1, I had no income therefore no choice, just took whatever I could find, which was a private loan 67% LVR 2% above std home loans and 2 years to repay.
IPs 3 & 4, I'd refinanced to 30 year loans good IO loans standalone but one lender.
By year 3, the lender upgraded me to 75% LVR without me having to apply for it and I had enough money to pay for the commercial property at a time when no one wanted a suburban strip shopping complex.
CBA was happy to give me a construction loan if I x-collaterized but untangling the loans was a costly affair & I used some choice words so I no longer have loans with CBA. They did offer to increase my credit card limit!
So, don't x-collaterize, but if it's the simplest way, then it doesn't really make a lot of difference.
BTW, I started the acquisition phase very late so had a lot more equity. don't envy the old farts, we'd rather be like the young guns with no equity but started young.
good luck,
KYJust to clarify my earlier post, I have a different lender for my IP then my PPOR , I think this negates most of the problems of x-collaterisation. My IP lender has a second mortgage on my PPOR not my PPOR lender. Some may disagree and I would like them to explain the diffence betwen having the same lender. It is my understanding that different lenders with x-collaterisations is a different matter.
O…
speak to a good mortgage broker and they will steer you in the write direction, also on your loan structuring,so to maximiase your tax deductions and to keep it simple when it comes to tax time, so don't mix up investment debt with personal debt…..
yorkie
gezzy wrote:I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
GezHi Gez, I'll put my 2c worth in and try to answer that: Borrowing the maximum means you have the maximum possible value of property in your name. If all your properties increase in value by say 5% pa, then if you've managed to stretch your borrowings to own $2M worth of property, then you've made 100k of CG after a year. If you've been more conservative and only borrowed enough to own $1M then you've only made 50k of CG.
S/C.StumpCam wrote:gezzy wrote:I'm just curious, in relation to your above post, how does borrowing the maximum amount possible give you a larger potential for capital growth?
Cheers
GezHi Gez, I'll put my 2c worth in and try to answer that: Borrowing the maximum means you have the maximum possible value of property in your name. If all your properties increase in value by say 5% pa, then if you've managed to stretch your borrowings to own $2M worth of property, then you've made 100k of CG after a year. If you've been more conservative and only borrowed enough to own $1M then you've only made 50k of CG.
S/C.Hi S/C,
Thanks for the reply and the example – unfortunately dumb-dumbs here is still having a little trouble grasping the above concept. When we say "borrowing the maximum amount possible," are we saying, as an example, "borrow 100%" (if it were possible) as opposed to 95% or 90% etc?
Other than the issue of deductible interest, what would be the difference in borrowing say 100% from a bank to purchase a property and buying it using 100% cash? How does one give you a larger potential for capital growth? Is that even what was suggested with the comment about borrowing the maximum amount possible?
Cheers!
GezAlso thanks to KY, obie1 and yorkie for the replies.
I think he is referring to the idea of owning 10% of $10mil is better than owning 100% of $1mil.
If there is a CG increase of 10% across your portfolio, then you have made $1mil.
where as if you owned all of $1mil, then with the same CG increase you have only made an extra $100k.Is this the general concept?
Sorry Gez, been away for a while. The concept is a lot more general than just one property. Borrowing to the maximum possible simply means buying as many properties as you can within the limits of your equity and debt servicing capability. You are simply trying to maximise the total capital you control. The exact percentage borrowings for each property are just details.
Kidd1 you've got the right idea, but you need to clarify it a bit better. You need to write something like: Owning $10Mil of property with a debt of $9Mil is better than owning $1Mil with no debt. If you say you own 10% of $10Mil, it implies you only have a 10% share on the deed. You have to own the whole $10Mil as far as the deed is concerned, even though you owe $9Mil on it. (I know that's what you meant, ie you meant the bank kinda owns $9M worth)
Cheers, S/C.
StumpCam wrote:Sorry Gez, been away for a while. The concept is a lot more general than just one property. Borrowing to the maximum possible simply means buying as many properties as you can within the limits of your equity and debt servicing capability. You are simply trying to maximise the total capital you control. The exact percentage borrowings for each property are just details.Kidd1 you've got the right idea, but you need to clarify it a bit better. You need to write something like: Owning $10Mil of property with a debt of $9Mil is better than owning $1Mil with no debt. If you say you own 10% of $10Mil, it implies you only have a 10% share on the deed. You have to own the whole $10Mil as far as the deed is concerned, even though you owe $9Mil on it. (I know that's what you meant, ie you meant the bank kinda owns $9M worth)
Cheers, S/C.
Hi S/C,
Thanks for your reply. My question may have sounded silly but being a newbie, keen to get into the game, I needed to clarify.
It's funny because when my wife and I bought our PPOR almost a year and a half ago, our understanding was to pay off the home loan as quickly as possible and at the same time, wanting to get into property investing, try and save money for a deposit. Back then I didn't know anything about pumping money into your home loan on your PPOR, as that could be the source of a deposit for an IP. The whole time I'd been trying to save money and be patient thinking that would be our deposit. I'm glad that isn't the only way.
Now it's just a matter of doing more due diligence and taking action on what you guys have educated me in.
Thanks all – very much appreciated.
Gez
Gez it's fine to pay off your PPoR loan or save it; it's all good equity of one form or another towards your next IP. Every single dollar of equity you create by either paying off your loan, putting into an offset account or simply waiting for capital growth means that you can borrow another four towards your next IP. You'll probably be surprised how much you can borrow already if your PPoR is just a few years old. It may come down to your debt servicing ratio rather than your equity. Of course the rent from an IP counts towards your income (the banks only recognise about 75 to 80% of it though) which helps. It's a little juggling act we all have to go through as property investors.
Just one thing Gez, if there's any chance you'll be wanting to convert your current PPoR into an IP one day, then you'd be best to not pay any of the loan; keep all savings in an offset account to preserve the tax deductability of your loan.If only I knew 25 years ago what I'm preaching now! We went all out to pay out our home loan in just one year with both of us working and sacrificing just about everything so I could go back to uni for four years with no home loan and rent to pay. After uni we wanted to build a bigger house, but had to sell our first home so we could afford the new one. If I could go back in time, I'd tell myself "Don't pay off that first home loan you fool! Save all your cash for the new home and convert the first one into an IP!" I don't think 100% offset accounts were invented back then, but it wouldn't have made a huge difference for just one year. I sold that first home for 53k; they're now getting 400k for the same type in the same area.
Uni educated me on how to make gizmos, but not about property investment. I know which one pays better in the long run!
Cheers, S/C.
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